No More Learning

Saudi Arabia is the largest creditor and the UAE the main borrower although Bahrain’s exposure is outsize with its offshore banking emphasis. International providers have deleveraged in Kuwait but kept lines in Qatar which is gearing up for future World Cup hosting.

Gulf banks have capital adequacy ratios over 15 percent and NPL levels around 5 percent average with high provisioning rates outside Bahrain and Kuwait. FDI has been 5 percent of GDP mostly between Council members, although Europe’s share in Saudi Arabia is one-quarter of the total. Energy subsidies remain a budget drain, and domestic debt markets lack yield curves and corporate access. Social transfers may be better targeted toward new-hiring and training needs to remedy foreign labor reliance and steep youth unemployment and bridge public-private sector disparities. With ruling family traditions of secrecy, the Fund also urged improved collection and circulation of harmonized data through the Gulfstat agency which may soon appear.

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Ukraine’s Packed Winter Wallop
2012 November 13 by admin

Posted in: Europe
Ukrainian shares continued a 50 percent loss in the cellar of European frontier markets as the ruling party kept its parliamentary majority and fought off a challenge by a new group founded by champion boxer Klitschko in a contest widely criticized by foreign observers. The main opposition leader Tymoshenko was in jail on a 7-year sentence and the communist and rightist extremes improved their showings at Regions expense. Energy supplier Gazprom reacted to the results by refusing any winter gas price renegotiation as Russia tries to push membership in the Eurasia Union with Belarus and Kazakhstan as a quid pro quo. The IMF in turn is still pressing for 30-50 percent tariff hikes for households and utilities under its $15 billion lapsed program which has not scheduled a return mission. International reserves fell almost 10 percent on Fund repayment and dollar flight surrounding the elections, as 20-percent range devaluation is routinely cited to counter fiscal and current account deficits at 6 percent of GDP. The economy is on the verge of recession with slumping agricultural and steel exports and no more construction and infrastructure support from football event preparation. The government has managed sporadic Eurobond placements but local buyers have shunned both hyrvnia and foreign-currency denominated offerings. Credit growth has been anemic as overseas-owned banks deleverage and a de facto ban on retail FX lending is in place on a stagnant deposit base. Following his party’s victory President Yanukovych is now positioning for the next 2014 competition for the top post. He will introduce lower income taxes and business facilitation measures but has ruled out near-term currency and food and commodity price adjustments. The sovereign B rating has been stable and thinly-traded CDS spreads have been steady. The central bank will impose stricter rules for surrendering company euro earnings but insists outright controls are not contemplated. Ties with the EU are frozen over corruption and democracy reservations and debt crisis focus shelving partnership and free trade agreement prospects.

A wheat export ban to go into effect mid-November will anger other countries, as the same stance in 2010 was viewed as an Arab Spring contributor. For Egypt bread and other subsidies are a major topic for fiscal consolidation steps to be contained in an almost $5 billion IMF facility which could be finalized by December. The current budget will overshoot the projected 8 percent of GDP gap and inflation could again tip into double digits with higher staple costs. Tourism and Suez Canal revenues remain weak and international reserves are precarious at $15 billion or three months’ imports despite recent fund infusions from Qatar and Turkey. Constitution rewriting is hung up over clashes between Islamic party and other representatives over religious provisions as the Cairo exchange with a 50 percent advance is at the opposite performance extreme on nonetheless moderating tension.

India’s Strange Store-Bought Appeal
2012 November 12 by admin

Posted in: Asia
Indian equities maintained their Asia-beating pace despite the central bank’s decision not to lower the benchmark rate along with the cash reserve ratio on 7 percent-range inflation, and a widening investigation into alleged Wal-Mart violations braking momentum from recent multi-brand retail opening. The commerce ministry charged it with “illegal and clandestine investment” in local chains, adding to prosecutions in other big emerging markets. The Singh government had tried to reassert reform initiative and stave off credit rating downgrade to junk status with majority ownership scope provided supplies were 30 percent domestically sourced, although the states will have final approval. Separate proposals to expand private pension and insurance company stakes were sent to parliament with uncertain prospects with 2014 elections in sight and the Congress-party led coalition scrambling to inject new blood and stay cohesive. In a series of cabinet reshuffles, Finance Minister Chidambaram returned to the post while Gandhi children representing the next generation were untapped. The aviation sector, in turn, was liberalized without much opposition after Kingfisher’s bankruptcy suspended the main private network and banks pressed for relief as corporate weakness could double non-performing loans to 10 percent next year. Consumer portfolios had previously come under scrutiny with tighter prudential standards in the 2009 crisis aftermath. On the fiscal side a medium-term plan was presented to halve the deficit as subsidized diesel prices were hiked 10 percent. Electricity board debt will be restructured and withholding tax on overseas commercial borrowing was slashed from 20 percent to 5 percent. Industrial output has reversed negative readings, but the trade gap at $18 billion in September remains stubborn on energy imports and service export stagnation. With P/E ratios more in line with the 10-12 core universe average and the rupee off record bottoms against the dollar, equity inflows have resumed tentatively despite an October “flash crash” that wiped $70 billion from the market on an electronic glitch. Stricter trading procedures were imposed by regulators after a brokerage mistakenly placed dozens of sell orders.

High-frequency activity will now be introduced over time as Asian exchanges generally have second thoughts after blowups in the US and elsewhere. The technology focus supplemented recent corporate governance issues following scandals at closely-held family-run listings. That notoriety was keen in the other aspiring BRIC, Indonesia, as the Bakries and London backers fell out over management of their natural resources conglomerate. World coal prices are down and net debt may have reached $5 billion as the founders offered to retake the company private in a lowball offer rejected by international shareholders and spurring board resignations. The senior Bakrie may also be preparing his presidential candidacy as chair of the prominent Golkar party. Early opinion polls put him behind, as the Jakarta exchange registers minor gains on a big box of domestic demand and balance of payments concerns.

Argentina’s Nicked Court Jousting Gist
2012 November 12 by admin

Posted in: Latin America/Caribbean
Argentine debt was abandoned, erasing a 20 percent climb, as holdouts seeking full payment from the 2005 swap managed to seize a government ship in Ghana and then prevail in US Appeals Court on an earlier determination that existing bond repayments could be interrupted under equal creditor treatment. The navy training vessel Libertad was halted in Accra on a hedge fund claim for $370 million, as its interest group in Washington has secured votes against development bank loans while legal and arbitration awards are outstanding. The judicial ruling on the pari-passu clause in New York-entered bond covenants directly challenged the so-called “lock law” in the original swap refusing to honor billions of dollars in untendered instruments and the denial of the trustee money center bank to accounts. The decision was sent back for technical clarifications as the broader issues may now be taken up by the Supreme Court at Buenos Aires’ filing. President Christina Fernandez’s popular approval has plummeted to the 25 percent level, but she has ruled out compromise with the “vultures” and may now attempt to reroute transactions through protected offshore channels. Early in the fight the central bank had moved holdings to the Basle-based Bank for International Settlements to pre-empt private access. The spread over Treasuries on the 2017 issue jumped to 1000 basis points on the events, but the class had been under strain from a “pesofication” push reflected in far-reaching exchange controls and the inability of provinces to ensure dollar bond redemption after Chaco had to pay out in local currency. Sovereign, bank and corporate ratings were cut across-the-board on the squeeze which has not staunched capital flight estimated at $3. 5 billion in the first half as the black market peso rate tops 6 to the dollar. Street protests and labor strikes have erupted over higher living costs as official inflation continues to be underreported at half the 25-30 percent expert estimate. Headline interest rates are near 15 percent as banks are ordered to support preferred borrowers. The primary fiscal balance has gone into the red, and agricultural producers just coming out of drought fear that the President may again try to raise their taxes in advance of upcoming elections.

After engaging in a trade spat with Brazil, the government turned its ire to neighboring Colombia which asserts a larger GDP in currency-adjusted terms. Foreign ministers took to online posts in the Financial Times to battle over relative economic size. President Santos, after cancer surgery, dispatched negotiators to begin formal peace talk with rebels, as fiscal reform may unify the foreign investor withholding tax for local bonds at 25 percent. The central bank has been on hold after reversing course to easing as regular peso intervention has increased in a battle with portfolio and direct inflows.

Greek Debt Restructuring’s Retrospective Remorse
2012 November 6 by admin

Posted in: Europe
A special public-private sector group convened by the IIF to adapt emerging market sovereign debt workout principles to advanced countries highlighted glaring weaknesses in the initial Greek case in basic tenets such as data and information sharing, good-faith negotiations, and equal creditor treatment. European officials and banking executives were prominent on the committee, which also included US, Asian and Latin American representatives. The organization coordinated the investor side for six months of negotiations that concluded in this April’s exchange which featured a headline 75 percent haircut. It got initial 83. 5 percent acceptance which rose another 15 percent with the application of domestic law collective action clauses. EUR 205 billion in bonds and loans were covered, and the deal was considered voluntary even as official parties providing their own assistance periodically threatened unilateral action. The IMF’s debt sustainability analysis attempting to reduce the medium term ratio to 120 percent of GDP was followed as economic indicators continuously shifted and deteriorated over the period. Numerous principle deviations resulted in an “inefficient and sub-optimal” process impeding commercial access normalization and financial stability, the panel believes. Bonds held by the ECB, national central banks, and the European Investment Bank were excluded, with such subordination of private claims implying adverse effects although the latest iterations of regional rescue mechanisms would end the practice. Contract sanctity was in turn placed in question by the retroactive insertion of CACs in instruments governed by local law which may cause their future shunning. The dialogue with mature country issuers has been “less extensive” than with developing economies, with formal investor relations programs often absent as recommended under decade-old guidelines. In the Euro area complexity was compounded by cross-border differences in accounting and regulatory standards, and the need for unanimous decision-making at the EU level.

On sustainability, private steering committee members criticized heavy emphasis on a nominal quantitative objective and limited consultation on policy and performance parameters that could have stressed cash-flow relief and maturity extension. The IMF’s independent judgment should be subject to input and views of interested outside parties to promote both analytical and monetary burden sharing. Information confidentiality should be respected by all sides, and the sovereign should be asked to contribute to the costs of ongoing advisory and statistical work. On a positive note the enhancements used, in particular GDP-linkage offering higher value for achieving growth thresholds, should be encouraged as a template. The ECB’s bond-buying expansion announced in September states it will be on pari passu terms, but this rendering appears to conflict with the ESM treaty assigning preferred status for European institutions just behind the IMF. The Spain bank recapitalization line arranged over the summer pledges comparable standing, but it has yet to be implemented and may itself be subordinated by a larger bailout subverting recent intent.

The Middle East’s Brazen Business Undoing
2012 October 31 by admin

Posted in: General Emerging Markets
The World Bank hailed thousands of regulatory reforms carried out across developing regions as its Doing Business ranking marked a decade, while regretting “slow momentum” in the Middle East and North Africa post-Arab spring. It described older firms and managers on average stifling innovation and new business creation, and deep mistrust between companies and officials amid festering corruption. Governance and transparency structures lag with the area’s average score in the list’s bottom half at 98. In Egypt no “visible improvements” occurred the past four years, as neighboring countries showed the least headway in the latest annual review since the publication began. In contrast, troubled Southern Europe undergoing its own transition achieved major changes prodded by bilateral and multilateral adjustment programs. Greece was among the leading ten gainers in 2011-12; Italy eased electricity connection; Portugal simplified construction approval and Spain revised bankruptcy law and customs procedures. Eastern Europe along with Central Asia advanced most for the period. Poland was a standout in insolvency and property registration overhaul, including record digitization, and introduced a new commercial contract code. Serbia’s enforcement system added bailiffs and electronic entry, while Mongolia and Uzbekistan established personal credit information access. Kazakhstan and Ukraine reduced the capital requirements for incorporation, while Georgia solidified its position as the top performer since 2005, with a half-dozen measure despite hard-fought elections which could magnify the trend with a billionaire executive becoming prime minister. It opened one-stop trade clearance posts and modernized collateral and secured transactions treatment. In Africa, Rwanda too continued to punch above its economic weight as one-third of all business facilitation strides have come from the continent in recent years. Administrative steps have dominated with legal strengthening a more arduous and elusive target. The top 10 friendliest locations overall are mainly OECD, but also feature Hong Kong and South Korea. Two of the BRICs, China and India, are among the 50 greatest improvers, with the former enacting a series of updated laws and the latter focusing on rule streamlining.

In Latin America, where the original work was pioneered by Peruvian economist Hernando De Soto with time and motion studies for company startups, Colombia has been a champion, but in the past year it was outstripped by Costa Rica’s achievements. Tax payments and sanitary certifications were reorganized and borrowers can now inspect their personal data. The hemisphere also includes global laggard Venezuela, where cost and complexity continue to “undermine property rights and investor protections,” in the view of hundreds of firms and analysts on the ground involved in the evaluation. Despite the micro-economic critique, President Chavez upon handily beating the opposition by 10 percent for re-election unveiled a future budget outline not contemplating practical or policy shifts in his own enraged entrepreneurial vision.

West Africa’s Delicate Debt Dalliance
2012 October 26 by admin

Posted in: Africa
As Cote d’Ivoire began a formal proxy campaign with bondholders to devise an interest arrears repayment plan after winning HIPC relief and Mali succeeded it in civil war in the French West African UEMOA zone, the IMF circulated a paper urging accelerated regional debt market development after a decade of mixed results, with the goal of long-term funding mobilization still elusive. The area central bank oversees Treasury bill issuance dominating the market as governments can no longer rely on overdraft facilities to cover budget deficits. Along with sovereigns, the regional development lender BOAD is a benchmark source, and the World Bank’s IFC arm and other donor agencies have placed local currency “kola bonds. ” Auctions are the typical primary channel with occasional syndication and all instruments along the curve out to 7 years are open to foreign investors. At the start of 2010 before the Cote d’Ivoire conflict re-erupted gross bond activity was CFA Franc 1. 2 trillion accounting for almost one-fifth of member country public and private flows. Commercial banks are the main buyers for immediate liquidity and capital adequacy purposes with a zero-risk weighting. Abidjan took 70 percent of the action with the remaining 30 percent in Benin, Burkina Faso, Mali and Senegal. Three and six-month maturities were most frequent, and subscription rates were near 200 percent. Twenty private companies floated bonds over the period keyed to the BOAD yield at 5-7 year tenors, but even with the pegged exchange rate and 5 percent-plus coupons emerging market investor interest was “marginal” according to the Fund. In the past two years initiatives to secure credit ratings and harmonize tax treatment have aimed to reverse the trend, with Benin, Burkina Faso and Senegal carrying B grades from Fitch and S&P. Their assessments have contributed to lower interest rates, and yield curves are generally upward sloping, but illiquidity with scant secondary trading continues to impose a cost premium. Banks for their part may be overexposed to short term government paper at an average 25 percent of total assets.

The “shallow buy-side” of institutional investors like insurance, pension and social security funds is an additional obstacle, the report comments. Debt statistics and strategies are unreliable and unavailable to the public, and bidding procedures are uncertain and erratic, Banking system stability risks were underscored with Cote d’Ivoire’s threatened default on local as well as external debt in the aftermath of disputed elections. New demand and supply bases will lay a stronger foundation for the future and capital controls should be “revisited” to attract overseas investors. National treasuries are to reveal cash flow and medium-term borrowing plans under current reforms, and a West African Monetary Union securities body has just been created to work with the central bank on fixed-income promotion as Abidjan again talks up a restructuring deal.

The IIF’s Anxious Anniversary Annals
2012 October 26 by admin

Posted in: Fund Flows
The Institute for International Finance marked 30years and the retirement of its longtime director at the Tokyo IMF-World Bank sessions as it raised the annual capital flows forecast slightly, with an over $1 trillion showing particularly on improved cross-border debt and Asian direct and portfolio investment prospects. Its conference featured an appearance by US Treasury Secretary Geithner and an annual review of application of its bond restructuring principles to the opposite cases in complexity and size of Greece and Saint Kitts-Nevis, where the leadership assumed an unprecedented creditor steering committee role in the former triggering controversy among the global bank and non-bank membership with diverging interests. The evaluation found that guidelines had been followed although the Greek haircut represented departures with the simultaneous historic developed country and EU regional workout. Prices have since doubled for the defaulted private instruments as the official Troika may disburse an installment delayed since June and extend the program timeline and the ECB signals increased future bond-buying support. A headline bank merger has been resubmitted and the coalition arrangement between the two main parties has held despite persistent violent protests and attacks from populist and far-right rivals. At the IIF an executive search is underway for a successor to former Treasury Undersecretary for International Affairs Dallara, with candidates likely to include recent occupants of that key government position. As with the IMF governance battle emerging market representatives argue that the top post could be drawn from their constituency for the first time among many public and private sector luminaries.

The transition will occur as the Fed’s QE3 and anti-slowdown fiscal and monetary space keep net private capital flows to thirty destinations above $1 trillion, although at 4 percent of GDP half their pre-crisis peak. A study confirms that emerging market mutual fund commitments grow after industrial country central bank asset purchases even as economic expansion will not reach 5 percent for the universe. FDI is the exception with an expected return next year to $535 billion at almost the previous high despite stagnation in top recipient China, with Latin America registering a “remarkable” gain. In other categories equities are more attractive with average P/E ratios around 10 and bank lending stabilized according to the latest quarterly conditions survey. Both sovereign and corporate debt at one-third of total exposure remain buoyant with the latter jumping by half since 2008 and standing at $150 billion in Q3 mostly from Asia. On official flows only traditional bilateral and multilateral sources are collected excluding Chinese and other providers. Sovereign wealth vehicles with $5 trillion in assets may also be missed unless activity is tracked in standard investment data and as they target countries outside the IIF’s roster. The update also notes the developing world’s mounting outward capital heft despite flight tendencies in Russia and elsewhere that seem regular rites.



Japan’s Straying Standoff Routines
2012 October 22 by admin

Posted in: Asia
Top Chinese officials and bankers boycotted the IMF’s annual event in Tokyo as Japanese automakers also felt the strain from mutually claimed islands with historic and natural resources implications, despite increased cross-border portfolio ties reflected in central bank and mutual fund industry figures. The 8. 5 percent foreign share of JGBs includes mainland allocation and retail toshin flows to emerging market debt and currencies in particular together at over $100 billion are again rising after a pause. In the trusts’ former category half the exposure is to hard currency mainly in Brazil and the region. In the local-currency denominated Uridashi segment, Russia and Turkey are popular, while sovereign and quasi-sovereign borrowers from Indonesia, Mexico, Korea and the Persian Gulf are active in the yen Samurai market. The giant state postal and pension funds have announced strategies targeting higher developing country returns while the megabanks Mitsubishi UFJ, Sumitomo Mitsui and Mizuho have expanded Asian loan books around 20 percent over the past year following corporate customers and development aid programs. In project and trade finance they have moved into the space vacated by European providers as total lines to Asean, China, and India reach $300 billion. They can underwrite the activity two-thirds from deposits on hand and it contributes a large chunk of gross profit according to industry analysts with low-performing assets at home. In its Global Financial Stability Report released at the meeting the IMF warned of “overconcentration” in domestic government bonds already one-quarter of bank holdings. It calculated that current yields were one percent above fair value and that minor price shifts could trigger mark-to-market losses that erode if not eliminate Tier 1 capital for smaller institutions. Traditionally reliable business customers like electronics firm Sharp have gotten into trouble, and automakers just recovering from recalls and 2011 supply chain disruptions from the Fukushima earthquake and Thai floods will further suffer from the Chinese trade boycott over the island spat.

Public debt at over 200 percent of GDP is in “uncharted territory” in the OECD’s words and rater S&P predicts continued deflation and economic and political stagnation. Growth was barely positive in the latest quarter as a trade deficit forms with the high yen and cost of energy imports with nuclear plant shutdown. The central bank has refrained from currency intervention but may target foreign bond buying as an additional tool in unconventional monetary policy to combat internal and external squeezes. Prime Minister Noda reshuffled the cabinet heading into elections after narrowly winning passage of a 2 percent hike in consumption tax effective 2014 to shrink the budget deficit. The interim Finance Minister comes from a labor union background with limited credentials, and opinion polls suggest the long-reining LDP will return to power on a nationalist populist platform which could leave the fiscal and geopolitical position further at sea.

Myanmar’s Prickly Prize Pursuits
2012 October 22 by admin

Posted in: Asia
As Nobel peace laureate Aung Sang Sui Kyi travelled to the US on a speaking tour at the same time the Myanmar President joined the UN General Assembly session after decades of absence, Washington moved further to ease sanctions by provisionally allowing imports as the Asian Development Bank prepared an inaugural detailed study on economic and financial sector constraints. Growth for the $50 billion GDP will be 6 percent on food-dependent inflation around that number, which is also a result of central bank monetary emission to fund the 5 percent budget deficit. State-owned banks dominate the system with a fixed 5 percent interest spread between lending and borrowing rates and mandatory Treasury bond allocation. Public debt is about half of output, tax revenue/GDP is below 5 percent, and defense spending outstrips education and health together. International reserves are $6 billion mainly on natural resource exports and investment, and the exchange rate which was pegged at 5-6 to the dollar has been replaced with a managed float now at the 800 level. One-quarter of the population is poor and progress toward the Millennium Development Goals lags Asean neighbors in disease and environmental categories. The strategic location in the Greater Mekong sub-region and between China and India could bring infrastructure and supply-chain inflows which tap the young labor force and abundant oil and gas reserves as well as agriculture and tourism potential. However primary commodities including energy, timber and farm and fish products are the mainstays, with textiles beginning to come back after the long commercial boycott period. A new banking law will grant monetary policy autonomy but private credit is under 25 percent of GDP. The ADB supports the removal of deposit-to-capital ratios and collateral requirements only recognizing property as regulation is modernized. Functional interbank and government bond markets are lacking and small and midsize firms have scant credit access.

In the first half of the year East Asia’s local currency bonds came to almost $6 trillion for an annual increase of 8. 5 percent, with the corporate outpacing the official segment. Their share of the global total is over 8 percent, led by China and Korea. Yields fell slightly with lower benchmark policy rates and foreign holdings were steady despite dipping below 30 percent in Indonesia. Vietnam’s growth was fastest entirely in government bonds, while the Philippines clip was at the bottom. In Thailand post-flood public works projects stimulated issuance. Islamic-style sukuk were prominent in Malaysia, and hybrid and perpetual structures featured in dozens of regional transactions. The Hong Kong renimbi “dim sum” market was lackluster as coupons were pushed higher. With subdued inflation and capital inflows released from further industrial world monetary easing yield curves should flatten although spreads have widened for lower-rated corporates which have instead tried to rise to the occasion of record international placement.

Global Bank Regulation’s Second Best Solution
2012 October 15 by admin

Posted in: Global Banking
On the eve of the IMF-World Bank annual gathering a Brookings Institute working group issued a report advocating a “second-best” approach to cross-border capital flow rules in the absence of full self-correcting mechanisms and multilateral oversight. It assumes that unbridled banking and debt movements will bring distortions that must be managed while extracting savings, investment and technology benefits from financial integration. Selective controls may be imposed, although they are prohibited under the EU’s two-decade old single market regime. The euro area has seen fund reversal within a monetary union given banks’ home bias, and the lack of central resolution authority and fiscal oversight. The study emphasizes reference to gross rather than net and credit versus portfolio and direct equity flows as instability indicators. Pro-cyclical bank lending in particular magnifies asset price swings with regular resort to wholesale borrowing beyond the retail deposit base. Institutional leverage can be high even where local units must be capitalized and organized as subsidiaries as in Central and Eastern Europe. Parent lines are now shrinking despite the EBRD’s Vienna Initiative which was effective in the immediate post-2008 crisis period. In Latin America domestic operations were not as geared and have proven more resilient, although both credit demand and supply have fallen. Emerging Europe has net foreign currency liabilities with negative balance sheet valuations while other regions are “long. ” Exchange rate fluctuations have not caused developing country financial crashes as in previous episodes with their better sovereign standing and prudential focus on potential mismatches. Flexibility alone did not bring relief as evidenced by forint fallout in Hungary, where weakness aided the trade account but elevated the burden of euro and Swiss franc obligations.

Basic international regulation should include data sharing, common enforcement practice, and loss division. In Europe the separate Systemic Risk Board and Banking Authority have no powers other than warning. The ECB may take primary responsibility under “union” plans but the responsibility split with national regulators must still be set. At the worldwide level the Basel Committee and Financial Stability Board have assumed these mandates but “momentum has dissipated” according to the expert panel of academics and former government officials. Capital adequacy and liquidity proposals were “watered down” with adjustment spans extended to end-decade. Shadow banking and OTC derivatives markets have seen even less regulatory progress. Administrative measures such as introduction of loan-to-value and debt-to-income ratios can be helpful and eliminating tax deductions for debt could contribute to safety. Liability restrictions such as special taxes have been tried in places like Korea but the low-interest environment abroad may offset its impact. The related web of inward capital curbs most prominent currently in Brazil may mitigate the boom tendency but they are an experiment still without “firm findings” the observers conclude.

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Zimbabwe’s Wayward Waterfall Soak
2012 October 15 by admin

Posted in: Africa
Zimbabwe stocks finished Q3 with a 10 percent MSCI frontier index pop despite drought and banking and diamond setbacks and heavy borrowing from China at over 1. 5 percent of GDP for Victoria Falls airport reconstruction. GDP growth and inflation are both put around 4 percent this year by the IMF, with a whopping current account deficit financed by the rundown of international reserves to less than a month’s imports. Fiscal stress was “aggravated” in the first half by the hiring of 8000 security officers as half the banking system fell below the 25 percent mandatory liquidity ratio. Three institutions were shuttered by the central bank, which itself is in arrears after freezing statutory reserves on account. Marange diamond field exports met the Kimberly process but are subject to US bilateral sanctions, and individuals associated with the Mugabe regime remain under multilateral penalties as another round of elections is widely anticipated in 2013. Reverse contagion is a risk as mining woes in South Africa cut remittances even as the SADC bloc has allowed phased customs tariff reduction in view of lower competitiveness reinforced by the “chilling effect” of indigenization policy transferring foreign investor control in the Fund’s description. The budget deficit is over 6 percent of GDP and the government has resorted to “second best” capital spending elimination and may also try to get grants and credit lines from neighbors in response. The upcoming election cycle will foster further imbalances, and donor support may be needed to cover combined census, poll and constitutional referendum costs. Legislation that would channel precious metal revenue through a separate authority is stuck and the government has yet to join the Extractive Industry Transparency Initiative. One-third of banks do not meet higher capital requirements after Royal Bank and Genesis were closed. The monetary authority will issue securities over the medium term to reimburse seized deposits and may explore local-currency alternatives to the dollar-rand framework as confidence is restored, which could include revival of the T-bill market. As it no longer has a lender of last resort function the finance ministry has provided an initial endowment for emergencies but a comprehensive overhaul involving recapitalization, non-core asset disposal and outside audit is still pending.

Regional and international participants may withdraw equity and management skill if indigenization is handled in a forced “destabilizing” fashion, according to the report. The current account deficit will be 20 percent of GDP, and the World Bank’s Doing Business ranking is 170 out of 180 countries with bottom marks for property rights, infrastructure and governance.
External debt is unsustainable at 115 percent of national income, over half in arrears, and a complex relief strategy will have to be in place before start of a simple staff-monitored arrangement, the Fund admonished.

Central Europe’s Easy Ride Riddle
2012 October 12 by admin

Posted in: Europe
Stock markets in Hungary and Poland were up 20 percent through Q3 on the MSCI index on anticipated easing of the Eurozone debt crisis with the ECB offering conditional further support and monetary policy shifts toward resuscitating flat growth. Hungary’s central bank defied currency risk with a 25 basis point slash to combat recession as well as fiscal deficit target overshooting, as another round of IMF loan negotiations was postponed until after the mid-October annual meeting and Budapest formally responds to a letter listing outstanding issues. On higher taxes inflation has crept to 5 percent and business sentiment is at a 3-year low. The European Commission dispute over withheld cohesion funds could be revisited with official and private forecasts for budget gaps above the 3 percent of GDP Maastricht target through next year. Critics have also begun to charge official laxity through the “quantitative easing” program extending 2-year facilities for corporate borrowing which continues to slide. The Orban government’s approval reading is at 15 percent, and he insists that special levies be maintained on foreign-owned banks and industries rather than taking revenue from households and individuals. In a spat with fund giant Templeton, which is a large holder of local Treasury bills with 3-month yields at 6. 5 percent, collectors have demanded back dividend taxes, and an Asian outsourcing contractor was the latest to introduce job cuts amid the difficult cost climate. The Polish central bank stayed on hold at the October meeting despite a GDP growth downgrade to 2 percent, and a push for bigger listed state company dividends, including from insurer PZU and copper miner KGHM, to keep public debt below the constitutional limit even though needs have been pre-financed through the beginning of 2013. After defaulting on $2. 5 billion in debt construction firm Polimex won a large bid which could facilitate restructuring over the coming months, although the broader PMI is at meager 47. Prime Minister Tusk has promised to unveil a fresh reform package to mark his second term and to clarify euro entry intentions which had originally assumed a mid-decade timetable.

The Czech Republic was flat at the rear of the core trio as the ruling coalition split on fiscal austerity moves again hung in the balance after another no-confidence vote. It was first in the group clearly in recession, and export recovery remains hampered by koruna strength against the single currency. In contrast the neighboring Romanian exchange which was ahead 4 percent at end-quarter has experience unrelenting leu pressure as elections are scheduled once more after an aborted constitutional referendum and the EU-IMF backstop may be tapped in the interim. Recent missions have granted decent marks but growth is at a standstill and an attempted chemical company privatization was again challenged for lack of ease and transparency.

Local Bonds’ Evocative Evolution Story
2012 October 12 by admin

Posted in: General Emerging Markets
Although hard-currency fund inflows are well ahead this year on flight to safety and other considerations, local bonds’ asset class future is bright and solid according to JP Morgan’s latest annual guide to 35 markets. Despite volatility stoked by greenback and euro shifts domestic government and corporate issuance dominates the multitrillion-dollar emerging economy debt field and the benchmark index is up double-digits through Q3. Foreign investors hold one-fifth of local instruments at a 4 percent yield premium or 2. 5 percent inflation-adjusted over US Treasuries. The long-term appreciation trend based on the IMF’s purchasing power parity and other measures is still in place and capital inflow curbs have recently abated the research notes. Central bank currency intervention has increasingly been on both sides as a stable level is targeted and “macro prudential” steps are directed mostly to banks. EMTA statistics show local-currency at 70 percent of overall trading volume as the outstanding stock is quadruple the external sum at almost $8 trillion. The GBI-EM market size is $1. 5 trillion, as predicted gross sovereign placement will top $2 trillion this year, with China representing over half of activity. By comparison developed market issuance will be $4. 5 trillion, half from the US followed by Japan. Standard euro area commercial completion outside special programs will drop to $200 billion as emerging Europe demand struggles beyond Poland and Turkey. Among subgroups available inflation linkers mostly from Brazil come to $475 billion and corporates have expanded 20 percent the past two years to $2 trillion, three-quarters concentrated in Asia. Banks have tapped the outlet as syndicated loans have dwindled under deleveraging and regulatory causes to just $100 billion through September. A dozen domestic bond ETFs with $3. 5 billion in assets facilitate retail and institutional participation, with pension and insurance pools in developing markets themselves currently at $4. 5 trillion.

Insurance company holdings are $1 trillion larger than pensions and the Asian life sector has grown particularly fast in China, India, Korea and Taiwan. European social security schemes with $500 billion in hand have followed Latin America in establishing private defined-contribution pillars. In the latter five countries’ schemes had $650 billion in assets as of end-2011, with $400 billion in fixed-income. Uruguay has seen the most rapid increase and allocation there cannot go into equities. In Chile the AFP portfolios amount to over half of GDP, and the members in Colombia and Mexico are overweight bonds versus their class limits. In the former banks have gone on a borrowing spree at home and abroad helping the peso to lead all currencies with an 8 percent advance to the dollar despite stepped-up buying by the central bank and petroleum wealth fund. The economic growth forecast was recently raised to 4 percent on domestic demand and public investment offering reliable bonds.

South Africa’s Platinum Reputation Rupture
2012 October 9 by admin

Posted in: Africa
The Johannesburg Exchange fought to stay positive as foreign investors dumped premier mining shares as bloody confrontations and closures spread nationwide from the original Marikana site, with President Zuma warning that the standoff could again portend recession. The precious metals industry accounts for over one-tenth of GDP in direct and indirect contributions, as Q2 statistics showed the economy already missing the 3 percent growth forecast with unemployment frozen at 25 percent. Rating agencies put the sovereign on notice for a downgrade for fiscal and structural reform doubts heading into the next presidential elections, where ANC intraparty splits have played out in a more militant stance by a breakaway mineworker union and continued calls for expropriation by expelled youth-wing leader Malema, who has been accused by the government of tax and money-laundering offenses. The black economic empowerment agenda for the industry, which was subject to a voluntary charter transferring management and ownership control over time, was challenged by the initial violent protest despite the participation of indigenous executives in Lonmin’s team. The rand sold off toward 8. 5 to the dollar in the aftermath as the current account deficit could now exceed 6 percent of GDP. To maintain currency confidence the central bank was on hold at its September meeting despite inflation around 5 percent as food prices moderated. Policy drift may last through the December ANC convention as the president and his opponents focus on corralling political support, which may bring ratings demotion offsetting the country’s entry into the Citigroup benchmark world bond index. On the electoral front the ruling party has to worry about internal dissension as well as opinion survey inroads from the rival Democratic Alliance, which has won local office and begun to attract backing beyond the white minority founders. President Zuma has resisted calls for his resignation and intends to hang on through next year as many in the post-apartheid coalition seek a compromise succession candidate.

The IMF also urged that public debt be placed on a path toward 35 percent of GDP over the next five years through “rebalancing spending” as the mining employees were granted a 20 percent wage increase after the events and a new health insurance scheme is launched to cover the population with a high disease and poverty toll. Its Article IV report recommended labor market and savings mobilization changes acquiring urgency with lower export demand from Europe and China. Skill and geographic “mismatches” worsen inequality and consumer choice is limited. The Fund praised diversification across the continent while noting that banks are “heavily exposed” to home mortgage portfolio and liquidity swings. Outward liberalization of capital controls has been cautious in its view as portfolio investors brace for possible further reckless confrontation on inflow treatment.



Mexico’s Hedged Bet Hemming
2012 October 9 by admin

Posted in: Latin America/Caribbean
Mexican shares continued to lead Latam indices as officials struck another oil hedge to guard against lower prices and Banco Santander completed a successful offering in part to satisfy Eurozone crisis and Basel III calls for increased local capital cushions at foreign-owned units. The moves coincide with preparations for PRI President Perez Nieto to assume the post at year-end with an immediate agenda of labor, fiscal and Pemex reforms which will require endorsement from the conservative PAN party to pass into law. GDP growth is expected at 4 percent despite recent US export and retail sale softness as foreign manufacturers have relocated from China’s higher wage and infrastructure costs. The PMI reading is 55, and the current account should be in rough balance as almost $10 billion in FDI was registered the first half. With the peso up 7. 5 percent against the dollar bond investors have poured into the long-term 10-year plus segment with one-third ownership control. The central bank has refrained from currency intervention and changing the benchmark rate as food staples exert inflationary tendencies. It has heightened scrutiny of double-digit consumer lending growth despite a good banking industry review by S&P of asset, liquidity and profitability ratios. Homebuilders benefiting from mortgage takeoff have reported troubles which could raise the current 2. 5 percent minimal NPL number. In Brazil, a handful of small personal lenders have already gone under and in the latest Banco Cruzeiro case the government trustee could not find a buyer as bondholders were forced to accept a 50 percent recovery value. There overdue consumer credit is at 8 percent of the total as housing prices jumped 100 percent on average the past five years in Rio and Sao Paulo according to Fitch Ratings. To maintain borrowing access the Finance Ministry has begun to lift capital controls but heavy reserve use has been deployed around the 2 real per dollar corridor.

In Argentina banks have been subject to greater state interference with orders to extend $3. 5 billion to designated priorities including small companies over a three-year maturity at an interest ceiling of 15 percent. The IMF granted a 90-day extension to clean up inflation and growth statistics or face sanctions as private analysts assert that the economy is near recession on a 20-30 percent CPI rise. The equity market is the MSCI frontier laggard although bonds have gone positive on the EMBI with the announcement that reserves will again be earmarked for repayment. Chile has also seen double-digit loan expansion and the system relies on “moderate” external funding, according to S&P. Inflation is the region’s lowest at 2. 5 percent and GDP growth should be 5 percent despite slowing copper demand from China and Europe. The monetary authority has been on hold despite 10 percent peso appreciation gambling with exporter margins.

Islamic Bonds Asia-Gulf Gulp
2012 October 4 by admin

Posted in: General Emerging Markets
While Asian and Gulf equity markets have carried disappointment this year, the Islamic sukuk bonds in and between both regions are at an “inflection point” according to a Standard & Poor’s report at $75 billion through July, $10 billion less than in all of 2011 when the respective Malaysia and GCC totals were $65 billion and $20 billion. According to Malaysia’s Securities Commission public and corporate instruments outstanding are almost $150 billion, with the latter dominated by quasi-sovereign like the Khazanah wealth fund and mortgage company Cagamas. 165 dedicated unit trusts were registered with a net asset value of $10 billion. An Islamic ETF is listed on the Kuala Lumpur exchange, and dozens of shariah advisers have been approved with local and foreign domiciles. The S&P paper points out that Gulf infrastructure issuers have been “crossing the figurative border” with ringitt placements from Abu Dhabi and Bahrain. Saudi Arabia has led the area sukuk pack to date with $9 billion in activity, followed by the UAE and Qatar. Average yields measured by benchmark global indices are at a post-crisis low of 3. 5 percent, and the standard-setting Accounting and Auditing Organization has forged bilateral compliance for 80 percent of available paper. The structure, with physical collateral backing guaranteed payments, is well suited for water and power projects estimated at hundreds of billions of dollars over the next decade. Qatar must invest $65 billion to host the World Cup in 2022, and Indonesia has a $200 billion electricity and transport program set though 2015. A restructuring history especially in Dubai and Kuwait offers a precedent for future workouts despite lingering acrimony. In the $10 billion creditor dispute with Dubai Holding several banks have demanded international arbitration and rejected negotiating proposals. Asia is now the GCC’s top trade partner taking 40 percent of energy exports, and Chinese and Korean telecom and natural resource firms in particular have expanded FDI. Increasingly bond maturities are stretching beyond 10 years as previously active project lenders pare exposure under Eurozone crisis and Basel III edicts.

The survey noted Malaysia world dominance with 40 percent of the Islamic-style fixed-income space over the last 5-year strategy, while the 2020 blueprint foresees a $1 trillion market. It sees Indonesia as a distant regional second despite its far larger population as the framework still does not allow sales under beneficial ownership and pilot sovereign efforts have just begun while corporate rules are lacking. Saudi leadership in the GCC could be consolidated by activity expected under the new mortgage law, with over 1 million additional homes needed by mid- decade to satisfy demand according to officials. The agency authors have assigned ratings to a dozen transactions, and are “optimistic” about the globalization of Islamic finance even with the traditional ambivalence over exchange rate and banking and securities industry directions.

The Sub-Sahara’s Bond Breakthrough Bid
2012 October 4 by admin

Posted in: Africa
As the African Development Bank carried out bond data and technical initiatives based on the ADB’s post-Asia crisis model, Nigeria and Zambia were the latest to mark watershed moves with respective entry into the JP Morgan benchmark local index and a global issue debut. Nigerian Treasuries will comprise only 1 percent of the roster but the addition may bring a $1 billion inflow into the $35 billion market, and the 10-year yield dropped 4 percent to 12 percent and the naira firmed to 155 to the dollar as inclusion goes into effect in October. The Goodluck administration may also launch its first sovereign offering since winning election, and corporates such as oil group Afren which have appeared may enhance their profile. Net public debt is only 15 percent of GDP but bank and fiscal consolidation setbacks could worsen the load, according to S&P, which assigns a B+/B grade with positive outlook. Ratings agencies regularly question double-digit credit growth and capital adequacy overestimation at the surviving post-crisis banks, and reiterate governance and security constraints and per-capita income and infrastructure weakness offsetting oil-driven current account and foreign reserve boosts. Inflation persists over 10 percent with the central bank holding rates. Rumors continue to circulate that the deadly Boko Haram will turn from religious to commercial targets and focus attacks on Lagos and Abuja. The Finance Ministry nonetheless has pressed on with a $1 billion sovereign wealth fund startup to succeed the excess crude account depleted by misappropriation and poor management, and in a separate bond pilot has laid the groundwork for an Islamic sukuk. Zambia’s 10-year $750 million placement got $12 billion in orders at a yield below Spain’s at 5. 6 percent despite FX restrictions which mandate local transactions in kwacha. The government maintains threats to outlaw the opposition party and has doubled copper royalties as it prepares a general overhaul of the mining regime after several violent labor confrontations with Chinese executives.

Kenya, which has been the continent’s frontier stock exchange leader, has grabbed fixed-income attention after obtaining an offshore syndicated loan despite the 45 percent debt-GDP ratio and a record 350 basis point rate slash to 13 percent on lower food price inflation. The shilling stayed firm at 85 to the dollar despite additional jitters as Muslims rioted after the killing of a renowned cleric and tribal infighting over land rights resumed in the stretch toward next year’s elections. The assassination in Mombasa reinforced complaints about minority discrimination and the lack of development and anti-terror aid in the city as civil war rivalry spills over from Somalia. On the infrastructure front the state power company received a World Bank $200 million facility for upgrades and eventual connection to the neighboring Southern African grid experiencing its own network knocks.

The World Bank’s State Finance Fiends
2012 October 1 by admin

Posted in: General Emerging Markets
In its inaugural Global Financial Development Report released on the fourth anniversary of Lehman Brothers’ failure the World Bank examined the government’s post-crisis role in promoting competition, regulation, infrastructure and stability with a mixed scorecard for developing economies. It points out that less advanced countries allow more scope for state intervention amid lagging institutional frameworks and that banking and securities executives and policymakers remain at odds over the rationale and results of emergency actions. Globally the worst-hit systems since 2008 have common features, including broader capital definitions, and lower loan provision, audit and data standards. In addition to ranking the overall sector and credit and capital market components across a depth, inclusion, efficiency and safety matrix the work cites best practice examples in the categories from emerging regions. In Brazil corporate borrower is more developed than retail information, South Africa has consumer protection against unfair access and privacy moves, and Romania has adopted EU directives for mortgage offerings. In China, Russia and Mexico state development banks were ordered to provide liquidity lines to private participants, aid specific industries, and extend guarantees and trade finance to exporters and small firms. Their lending pattern has not been as pro-cyclical, but has also “worsened intermediation” with poor governance and risk-management records. Insurance schemes have been open-ended and failed to reach designated beneficiaries. Central banks injected funds to keep the payments network and over-the-counter derivatives activity functioning but stricter collateral and transparency treatment will obviate such future resort especially as swap transactions are directed toward open exchanges and central clearinghouses. These shifts are also important for settlement modernization in emerging securities markets which has struggled to match growth, according to the reference.

Through August debt fund flows of $32 billion have been almost double equity ones tracked by EPFR numbers, with two-thirds going to hard-currency versions. However local paper continues to dominate trading with a 70 percent share concentrated in Brazil, Mexico, and Russia, EMTA’s Q2 roundup reveals. Volume was down 17 percent on an annual basis for the period reflecting a “buy and hold” tendency amid the current Eurozone mess as well as decreased inventory for US dealers in particular under forthcoming Dodd-Frank provision representing another form of state influence. In Eurobonds corporate turnover at over one-tenth the total is approaching sovereigns, and CDS has also fallen with bans on “naked shorts” and other public and private rule changes, including ISDA modifications after Greece’s restructuring exercise. On the share side the BRICs have taken half of $17 billion in inflows despite uninspiring index outcomes, and ETFs are now their main conduit. Even where traditional vehicles recorded outflows as in Poland, Romania and the UAE the exchange-traded product moved in the opposite direction under a range of investor preferences often testing the integrity and sustainability of the post-Lehman innovations.

Central America’s Serial Standby Alerts
2012 October 1 by admin

Posted in: Latin America/Caribbean
Central American bonds, which feature in the EMBI, remained stymied by hesitant progress in restoring IMF programs after immediate post-crisis precautionary lines expired, especially with lagging fiscal and monetary policy fallbacks compared with larger Southern neighbors. In the Dominican Republic the new Danilo Medina team has continued its predecessor’s refusal to raise electricity tariffs as the state-owned utility owes private generators over $1 billion which will be raised in local debt markets. The oil import bill is again steep and improved collection and anti-theft measures are unmet conditions pivotal to resuming the Fund relationship, which is also endangered by tougher immigration and trade stances toward Haiti where a fresh prime minister from the business community has assumed office. El Salvador is out of compliance on fiscal missteps with its arrangement expiring March of next year as it prepares to launch an $800 million Eurobond to enable redemption of short-term Treasury bills. Debt/GDP in the dollarized economy is 10 percent over the area average of 40 percent and tax revenue must be raised from the 15 percent level in the next budget to reactivate the standby. Holders of the 2023 global bond can exercise a put option at par before year-end with few takers expected at the current 115 price. Only 2 percent growth is forecast through 2013 which could worsen with US slowdown and further criminal gang violence before presidential elections where the rightist Arena party may reclaim power after recent congressional inroads. Foreign investment has preferred safer and tech-oriented Costa Rica which notched first half 5 percent GDP expansion as the government got approval for a 10-year $4 billion external bond pipeline initially to cover an imminent January maturity. A high-magnitude earthquake will aggravate the fiscal gap already at 6 percent of output and the central bank does not intend to change the existing currency band to the dollar. In 2014 president Chinchilla will leave the post as attempts at spending reform have already been defeated several times.

Guatemala is still debating whether to approach the Fund again as it prepares a mix of domestic and foreign bond issuance around $750 billion in the latest budget. Official debt is low and US credit and remittance flows support the balance of payments, but the country has become a hemispheric drug war flash point drawing in unemployed youth. President Perez Molina won on a law and order and business climate overhaul platform where critics note delays. Governance concerns are more serious in Nicaragua where donors may withhold aid on Ortega executive assertions of control over the courts and other institutions. A $25 million claim from the HIPC-related commercial debt buyback five years ago is outstanding and Venezuelan oil collaboration faces political and health tests of aging advocates.

Iran’s Punitive Transaction Costs
2012 September 27 by admin

Posted in: MENA
The Tehran stock exchange had its worst monthly showing and was flat for the year as a tougher round of international trade and financial sanctions took hold, slashing oil output to a 20-year low and resulting in a record fine in the US for dedicated emerging bank Standard Chartered for uncovered violations. As the vise went into effect in July monthly petroleum production fell to 3 million barrels as customers scrambled to find alternative supply from Saudi Arabia, Russia and Iraq. A small Chinese lender was caught in the net for doing business with the regime, as UAE institutions with longstanding cross-strait links such as Noor Islamic Bank began to pull back. Regulators in New York and Washington now can pull the licenses and ban correspondent dealings with any intermediary that maintains even indirect connection through the worldwide SWIFT messaging network under the latest legislative proposals. Stanchart had long been under investigation by state and federal agencies for so-called name stripping to mask client identity, and its exposure followed illicit flow disclosures at HSBC and ING on a lesser scale. In 2011 40 percent of crude went to European buyers that along with shippers and insurers are under prohibition, and India, Japan and Turkey have also cut imports. Higher global prices have not made up for the volume fall with revenue off 25 percent, aggravating the hard currency shortage under the multi-tier system which favors food and other essential items. The rial has dropped over 50 percent against the dollar and official inflation is above 25 percent. According to the central bank, system liquidity was up 6. 5 percent in the first quarter of the Iranian calendar year and it will respond with large bond sterilization operations. On the equity market auto listings have been battered by a 35 percent sales slump, while the metals and mining sectors are also down despite p/e ratios around 5. Notwithstanding the sentiment, a $1. 5 billion refinery privatization IPO went ahead in June, although other company blocks were rejected.

Israeli shares likewise fell on confrontation odds as the central bank head acknowledged crisis preparation in the event of military action against nuclear facilities. The centrist party Kadima quit the government in a dispute over religious student army service and the timeline for a strike may be influenced by calls for early elections. With GDP growth unlikely to reach the 3 percent forecast, the benchmark interest rate was reduced 25 basis points and the fiscal deficit target was raised. The shekel slid to 3. 9 to the dollar on the shifts as foreign investors continue to shun local bonds after imposition of withholding tax. Family-owned conglomerates are experiencing their own debt woes as leverage and a popular divestiture push prompt restructurings in another adversarial arena.



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Brazil’s Competitiveness Fix Figments
2012 September 27 by admin

Posted in: Latin America/Caribbean
Brazilian shares stayed at the rear of main Latin markets, with utilities joining banks in beatings, as President Dilma Rousseff ordered business and consumer electricity cost reductions as part of an overall infrastructure modernization program targeting $60 billion in near-term public-private projects. Power firms were already reeling from bond defaults as financial institutions have long been under the gun to lower borrowing rates in line with the benchmark Selic slash to just over 7 percent despite worsening arrears. With anemic demand at home and abroad keeping GDP growth at 1. 5 percent as food and services push inflation toward 5 percent, supply-side reform has been prominent on the policy agenda with proposed administrative and tax streamlining. China appetite has offered a mixed reading for iron ore which constitutes one-quarter of commodity exports, as the new leadership at giant Vale prepared investors for a price around $90/ton and future operations rationalization. In offering relief to workers through other means the administration has held firm on resisting civil servant wage demands which could jeopardize the 3 percent of GDP primary budget surplus, while also hinting that the goal is flexible. On the exchange rate the course has also shifted to two-sided intervention to preserve a 2 real per dollar zone, which provided support for an oversubscribed fresh sovereign bond in August. The debt market which must mobilize long-term funding for the consecutive World Cup and Olympics gatherings through mid-decade was criticized in a recent IMF working paper for the 3-year average maturity of government paper and the small corporate size of 10 percent of GDP also of short duration and “limited buyer base and issuer diversification. ” 90 percent of the instruments are indexed with scant secondary trading by predominantly bank holders. Securitized activity for mortgages and trade receivables is expanding under the FIDC program and infrastructure bonds could benefit from new tax exemptions. However prime names will continue to spurn the channel with the availability of discount credit from state lender BNDES, which accounts for one-tenth of the financial system and has doubled its balance sheet the past five years. The analysis points out that big users can access alternative capital sources and that the gap it was founded to fill is now with midsize enterprises and as an anchor partner on domestic and foreign mega-deals.

Mexico, in contrast, has topped the large exchanges with a promised lighter official touch toward the currency, credit and energy markets as PRI President Perez Nieto readies for the post with near-party majorities in both houses. Economic growth could triple Brazil’s on solid internal and US support, and the outgoing Calderon administration may enact long-sought labor rule changes. Both equity and fixed-income players were relieved when giant Cemex won creditor approval for another restructuring, as relative standing in the cross-border rivalry looks to be cast in concrete.

Tunisia’s Jasmine Fragrance Fumes
2012 September 24 by admin

Posted in: MENA
As Egypt completed presidential elections and moved to secure billions of dollars in bilateral and multilateral lines to address its post-revolution economic emergency extending MSCI outperformance, Tunisian shares were flat through August in the run-up to polls early next year following interim government disputes over policy direction to tackle “urgent reform,” in the IMF’s view. After 2011’s recession Q1 statistics showed 5 percent GDP growth on better tourism and FDI on inflation above that figure on higher food costs. The external position, after a 7 percent of GDP current account deficit, was fragile as reserves were $6. 5 billion or 3 months’ imports, and on deficit spending public debt is at 45 percent of output, raising flags for a May sovereign ratings downgrade. The central bank head, who was a long-serving World Bank executive, quit his post under relentless demands for monetary easing to spur credit and employment which translated into benchmark rate and reserve requirement reductions and refinancing equal to 6 percent of GDP, while headline nonperforming loans held at almost 15 percent of the total under classification forbearance. The authority supplied massive liquidity and also mounted $700 million in exchange rate intervention though April for a minor depreciation against the euro. A benign scenario where $3 billion in outside budget support materializes and the European and Libyan situations stabilize could bring 2-3 percent growth this year, but bank solvency must still be addressed “adequately and rapidly,” according to the Fund’s Article IV report. With wage hikes and unadjusted energy subsidies the fiscal gap will exceed 7 percent of GDP, and the analysis urged tighter monetary policy and greater institutional independence and statistical reference in establishing targets. In the banking sector recapitalization of state-owned units has begun but measures must go further in unraveling the web of interest and credit controls accumulated over decades of the previous regime. Capital markets are paltry at only 2 percent of the economy with banks dominating stock exchange listings and pension fund investors and a bond yield curve absent. The limited financial depth constrains startup company potential for educated youth as former industry allocations went to low-skill manufacturing and services. Outside Tunis and other major cities access is even narrower foster regional income disparities with large rural poverty incidence.

Libya which just had its own landmark post-Gadhafi legislative elections in July won by the hodgepodge National Forces Alliance has reopened the oil taps and 25 percent growth this year will recover half 2011’s contraction as inflation also steadies at 10 percent and the dinar stays in the 1. 25 to the dollar range. Restrictions on deposit and currency withdrawals will be lifted soon as the system there looks to an initial commercialization phase by global as opposed to Green Book standards.

Japanese Banks’ Asia Apparitions
2012 September 24 by admin

Posted in: Asia
A decade after pulling back on heavy regional crisis losses, major Japanese banks are back in force with double-digit expansion in regional syndicated loans replacing European backers, despite their own credit downgrades on domestic portfolio pressures. Mitsubishi, Mizuho and SFMG have been matched on the securities side by big houses like Daiwa and Nomura, and retail investment trusts that have poured $60 billion into emerging market hard and local currency bonds worldwide mainly in Brazil. Separate overlay funds have involved plays on the real, rupiah, lira and other units and the giant government pension system with $1. 5 trillion in assets plans dedicated product allocation to emerging market equities for its conservative saver base. The Japanese Bank for International Cooperation has itself gotten into capital markets with a guarantee program for yen-denominated “samurai” debt issuance alongside its traditional role supporting direct investment and exports in developing economies, where the geographic emphasis has shifted to Africa and newer destinations. In Asian infrastructure and project finance only HSBC and Standard Chartered from the UK have arranged more and their positions may now be in jeopardy from the Eurozone crisis spillover and violations of Iran and money-laundering guidelines found by US regulators and under investigation in other jurisdictions. These directions take shape as loan growth at home barely budges with 2 percent GDP growth again in the cards as post-reconstruction spending wears off a year after the earthquake-tsunami. The outlays were underwritten by special bonds, but with gross public debt topping 200 percent of GDP Prime Minister Noda won opposition acquiescence to a gradual rise in sales tax in return for elections likely to be scheduled soon after Tokyo hosts the annual IMF-World Bank gathering next month. The Liberal Democrat Party is widely predicted to return to power on incumbent dissatisfaction, as the ruling DPJ itself splinters on fiscal and personality differences. The massive government debt poses large financial system risks, according to the central bank and IMF, which each pointed out the solvency and valuation impacts of minor basis point swings. Foreign ownership has likewise jumped to over 8 percent of the $13 trillion total across the yield curve as other developed market returns are paltry and yen appreciation remains intact.